About that farmland bubble…

U.S. farmland prices have doubled over the last decade, but this pricing bubble may soon burst, sending farmland prices dropping 20 percent. Some now question what will happen when monetary policy is tightened and the supply of grain grows.

“When we get a combination of those two things – declining grain prices and rising interest rates – we’re going to see an adjustment in farmland values in the Midwest,” Stephen Gabriel, chief economist at the Farm Credit Administration, told TheFinancial Times. “A 20 percent decline would not be out of the question.”

The repercussions of falling land prices would likely go well beyond farming. Concerns about the U.S. farm Credit System, raised by Fitch Ratings, question the system’s credit quality if and when land values begin to fall.

“The unprecedented spike in farm land values over the past several years is primarily being driven by the confluence of two factors: historic low interest rates and historic high commodity prices. Should these two factors rapidly reverse from their current levels, Fitch would expect a large correction in farm land values,” Fitch Ratings warned in 2012.

A Federal Reserve panel of bankers warned policy-makers of a farmland price bubble in February, according to a Bloomberg report.

“The margin pressures that the low-rate environment has put on financial institutions, coupled with dramatically increased compliance and other infrastructure costs, have caused many to seek higher returns by accepting greater interest-rate or credit risk,” the bankers said.

“Agricultural land prices are veering further from what makes sense. Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates,” the panel added.